REPORT DIGEST STATE’S LEASING DECISION PERFORMANCE AUDIT Release Date: MAY 2018 Audit performed in accordance with House Joint Resolution 63 State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov EXECUTIVE SUMMARY On June 28, 2017, the Illinois General Assembly adopted House Joint Resolution Number 63 which directed the Auditor General to conduct a performance audit of the State’s decision to enter into a five-year $2.4 million lease for property at 2410 South Grand Ave. East. The decision to enter into the lease actually involved two different leases – one for a file storage warehouse and one for an IT (Information Technology) and Telecommunications Support Center. After the winning vendors were selected but prior to the final award, the Department of Central Management Services (CMS) switched the purposes of the leases and the using agencies. However, CMS violated a provision of the Illinois Procurement Code by awarding leases to vendors who were not qualified respondents for the leases awarded. For example, the vendor awarded the warehouse lease was not a qualified respondent under the Procurement Code as it had submitted a response for the IT and Telecommunications Support Center and not the warehouse lease. This was no fault of the vendors as the decision to switch leases was made by CMS. In addition: • Offers were evaluated and awards selected based on the requirements set forth in the solicitation document. These requirements were then changed. • CMS and the Chief Procurement Office for General Services have characterized the switch of the leases as substituting using agencies. However, the switch was not a simple substituting of using agencies. Not only were the agencies changed, the purposes of the leases were changed, the structural layouts were changed, the tenant space requirements were changed, and the prices offered were changed. • Other responders did not get the opportunity to change their bids to meet the new lease requirements violating the principle of fair and equal treatment. • By not rebidding, CMS may have excluded potential bidders who were not afforded the opportunity to bid on the new space requirements. • The State Purchasing Officer responsible for reviewing the leases could not provide adequate documentation of review. Other key findings of the audit include the following: • The information provided by CMS to the Procurement Policy Board for the Department of Human Services (DHS) warehouse lease was misleading and incomplete which hampered the Board’s ability to review the lease. A draft version of the information sent to the Board contained additional language explaining the switching of leases but it was removed in the final version sent to the Board. • The amount of space requested in the DHS space request was insufficient to meet its file storage needs. DHS also could not provide documentation demonstrating any cost savings resulting from consolidating files. • CMS did not conduct an analysis of the cost-benefit of purchasing instead of leasing the property at 2410 South Grand Ave. East. • DHS has not conducted a comprehensive cost- benefit analysis of digitizing records. AUDIT SUMMARY AND RESULTS Dwight Correctional Center (Dwight) was closed effective March 26, 2013. In October 2013, the Illinois Department of Corrections submitted a request to the Department of Central Management Services (CMS) to surplus the Dwight property. At that time, it was decided to use the prison site for Department of Human Services (DHS) file storage. DHS began moving file cabinets and boxes to Dwight in January 2014. In September 2015, DHS submitted a space request to CMS for new file storage space in Central Illinois. The conditions at Dwight had deteriorated and DHS also needed additional space to consolidate files from local offices. On October 4, 2016, the DHS warehouse was awarded to Climate Controlled Holdings, LLC for a facility located at 2410 South Grand Ave. East in Springfield, Illinois. On June 28, 2017, the Illinois General Assembly adopted House Joint Resolution Number 63 which directed the Auditor General to conduct a performance audit of the State’s decision to enter into a five-year $2.4 million lease for property at 2410 South Grand Ave. East. The audit resolution contained 11 determinations. The decision to enter into the lease actually involved two different leases. The lease at 2410 South Grand Ave. East is for a DHS file storage warehouse. However, this lease originated as an IT (Information Technology) and Telecommunications Support Center for the Department of Innovation and Technology (DoIT). The DHS warehouse originated under a different lease. After the winning vendors were selected but prior to the final award, CMS switched the purposes of the leases and the using agencies. • In September 2015, DHS submitted a space request to CMS for a new file warehouse in Central Illinois. The solicitation was issued and four bids were received by the due date of December 15, 2015. On April 20, 2016, an offer was selected from MGM Jefferson Corporation for property at 719 W. Jefferson St. in Springfield, Illinois. • In September 2015, the CMS Bureau of Communications and Computer Services (BCCS), which is now DoIT, submitted a space request for an IT and Telecommunications Support Center to be located in Springfield. The solicitation was issued twice with no bids received. The solicitation was issued a third time with two bids received by the due date of February 24, 2016. On April 20, 2016, an offer was selected from Climate Controlled Holdings, LLC for property at 2410 South Grand Ave. East in Springfield, Illinois. On July 8, 2016, CMS decided to switch the lease facilities, awarding the DHS file warehouse to Climate Controlled Holdings and awarding the IT and Telecommunications Support Center to MGM Jefferson Corporation. It appeared that the decision to switch the leases was done with the intent of finding the best fit for the agencies as well as protecting both prospective landlords from loss of time, effort, and monies already expended. (pages 15-25) (Please see PDF version of this digest for Exhibit 1 -- Timeline of Events.) However, CMS violated a provision of the Illinois Procurement Code by awarding leases to vendors who were not qualified respondents for the leases awarded. Climate Controlled Holdings was not a qualified respondent under the Procurement Code as it had not submitted a response for the warehouse lease. Conversely, MGM Jefferson Corporation was awarded the BCCS IT and Telecommunications Support Center but was not a qualified respondent as it had submitted a response for the warehouse lease. This was no fault of the vendors as the decision to switch leases was made by CMS. The solicitation document, called the Request for Information, for each lease contained language on the selection of the winning vendor. Offers were evaluated and awards selected based on the requirements set forth in the Request for Information. These requirements were then changed. When CMS decided to switch the leases, officials did not give other responders the opportunity to change their bids to meet the new lease requirements violating the principle of fair and equal treatment. Also, by not rebidding the DHS warehouse lease or the BCCS IT and Telecommunications Support Center lease, CMS may have excluded potential bidders who were not afforded the opportunity to bid on the new space requirements. State Purchasing Officers, under the authority of the Chief Procurement Office (CPO) for General Services, have the authority to approve or reject contracts. However, the State Purchasing Officer responsible for reviewing the leases could not provide documentation of review other than emails to CMS stating “done” in reference to the publication of notices to the Illinois Procurement Bulletin. CMS and the Chief Procurement Office for General Services have characterized the switch of the leases as substituting using agencies. The State Purchasing Officer cited a section of the standard lease agreement that allows for a change in the using agency. However, the section would only apply once the lease was executed. Secondly, and more importantly, the switch was not a simple substituting of using agencies. Not only were the agencies changed, the purposes of the leases were changed, the structural layouts were changed, the tenant space requirements were changed, and the prices offered were changed. In summary: • DHS requested 26,000 square feet for a warehouse which was initially awarded to MGM Jefferson Corporation, which offered 24,210 square feet for property located on W. Jefferson St. in Springfield. DHS was moved to a 60,158 square foot warehouse located on South Grand Ave. East in Springfield. MGM Jefferson Corporation submitted a bid for a warehouse but was awarded an IT and Telecommunications Support Center. • BCCS requested 44,000 square feet of office and warehouse space which was initially awarded to Climate Controlled Holdings, which offered 44,000 square feet, plus additional space if needed, for property located on South Grand Ave. East. BCCS was instead moved to the 24,210 square foot facility located on W. Jefferson St. Climate Controlled Holdings submitted a bid for an IT and Telecommunications Support Center but was awarded a warehouse. ? Digest Exhibit 2 compares the two leases from the initial offer to the final award. For example, for lease #6627, the using agency, primary building use, square footage, and cost per square foot all changed from the time of the initial offer to the final award. The cost per square foot decreased from initial offer to final award for one lease and increased for the other. The exhibit also shows the shifting of the leases. The arrows show the IT and Telecommunications Support Center shifting from one lease to the other; the same shift occurred for the DHS file storage warehouse. (pages 26-35) (Please see PDF version of this digest for Exhibit 2.) Information Related to the Audit Determinations The audit determinations are discussed extensively in Chapter Three. Digest Exhibit 3 summarizes the status of the determinations. Following are the key findings related to the audit determinations. To justify the need for a new warehouse, DHS cited the poor conditions at Dwight Correctional Center and the need to consolidate files located at Family Community Resource Centers. DHS stated “This lease will end up saving a great deal of money as the warehouse space will be considerably less expensive than housing the files in the local offices.” However, DHS could not provide documentation to show an analysis had been conducted to demonstrate any cost savings. (Please see PDF version of this digest for Exhibit 3.) The amount of space requested in the DHS space request was insufficient to accommodate the files being stored at Dwight. That is without even considering any additional files that would be moved from other locations. DHS relied on advice from CMS in developing the space request but, as the agency submitting the space request, DHS is ultimately responsible for submitting an accurate request that fully accommodates its needs. (pages 38-41) CMS did not consider renovating space at Dwight Correctional Center. No cost projections were made to consider the costs of renovating versus leasing new space. CMS did not consider Dwight as functional enough to do an analysis on renovation. (pages 41-42) CMS did consider the availability of other State-owned and leased space before the decision to proceed with the DHS warehouse space request and concluded that no space was available. CMS does not typically consider shuttered properties, such as prisons, because they are not acceptable for occupancy due to the same issues seen at Dwight. (pages 42-44) CMS did not conduct an analysis of the cost- benefit of purchasing instead of leasing the property at 2410 South Grand Ave. East. Officials from CMS and the Capital Development Board signed a certification attesting that the lease was in the best interest of the State considering, among other items, “…the cost-benefits of purchasing or constructing new space.” However, it is impossible to know whether the lease is in the best interest of the State if a cost-benefit analysis of purchasing versus leasing is not performed. (pages 44-45) DHS has not conducted a comprehensive cost- benefit analysis comparing the costs of digitizing records as compared to maintaining records in hard copy form. The analysis DHS provided was completed in May 2017 after the warehouse lease was awarded. The analysis contained two estimates that had substantially different total costs, did not include sufficient support for how the estimates were determined, and did not address any of the points in the audit resolution. (pages 46-47) The Procurement Policy Board has the authority to review leases and object to leases. However, the DHS warehouse lease was not discussed or voted on at its October 2016 meeting. Because the Board did not object to the lease, it became effective at the end of the Board’s 30-day review period. The Board has no conflict of interest policies, but it does complete annual ethics training and has an unofficial practice of recusal in situations where there are conflicts of interest. (pages 48-49) CMS generally followed its leasing procedures in preparing the leases for publication. However, for one of the leases, other than posting to the Procurement Bulletin, no additional outreach was done to increase awareness of the lease to ensure adequate competition. In addition, the geographic boundaries may have been unduly restrictive. (pages 53-55) CMS officials said that they were unaware of any sharing of confidential information. However, emails indicated that the CMS Leasing Representative did share pricing information between the bidders selected for the awards for the two leases. This information was shared after CMS made the decision to switch the leases but prior to the final award and was done to facilitate negotiations on final pricing for the altered leases. (pages 56-57) Based on an examination of the lease files and other emails, as well as interviews with those involved, we found no evidence that relationships played a role in the warehouse lease. (pages 58-59) Other Issues The switching of leases lacked transparency. The information provided by CMS to the Procurement Policy Board for the DHS warehouse lease was misleading and incomplete which hampered the Board’s ability to review the lease. Based on the information provided, the Board would have been unable to tell that the lease originated as an IT and Telecommunications Support Center. A draft version of the white paper prepared by CMS contained additional explanatory language that was removed in the final version sent to the Board. (pages 62-65) The Illinois Procurement Code provides authority to Procurement Compliance Monitors to review procurements and report any findings to the agency and the Chief Procurement Officer. In the spring of 2017, after the leases were executed, the Executive Director of the Executive Ethics Commission directed a Procurement Compliance Monitor to examine the leases. However, the Procurement Compliance Monitor was directed to stop his review by the Commission when the Commission voted to refer the matter to the Office of the Executive Inspector General. No report on findings was provided to CMS or the Chief Procurement Officer. The Executive Director stated that once the Commission referred allegations and related documents to the Executive Inspector General, the State Officials and Employees Ethics Act confidentiality provisions come into play and commission members, their employees, and agents were required to keep the matter confidential and not disclose it. However, if agencies are not provided a report on the findings of reviews conducted, the agencies are unable to correct any procurement deficiencies. (pages 65-66) The Illinois Procurement Code gives responsibility to the chief procurement officers for publishing procurement notices to the Illinois Procurement Bulletin. For the two leases examined, posting to the Illinois Procurement Bulletin did not contain all of the information required by the Illinois Procurement Code and the General Services Standard Procurement Rules. In addition, for one of the leases, the procurement reference number was changed in the final award notice making it more difficult to track the lease from the initial posting. (pages 67-70) For real property lease procurements, the Illinois Procurement Code requires State Purchasing Officers to make a written determination identifying responses that meet the minimum criteria. However, the State Purchasing Officer’s review did not meet this requirement. In addition, there were no procedures in place to ensure the State Purchasing Officer’s comments and approval of the procurement process were documented. (pages 71-72) RECOMMENDATIONS This audit report contains ten recommendations: five recommendations directed to CMS; two recommendations directed to the CPO; one recommendation directed to both CMS and the CPO; one recommendation directed to DHS; and one recommendation directed to the Procurement Policy Board. The agencies generally agreed with the recommendations with the exception of the CPO who disagreed with Recommendation Number One. Appendix E to the audit report contains the agency responses. This performance audit was conducted by staff of the Office of the Auditor General. Joe Butcher Audit Manager This report is transmitted in accordance with Sections 3-14 and 3-15 of the Illinois State Auditing Act. FRANK J. MAUTINO Auditor General FJM:DJB